Sri Lanka central bank calms forex markets as treasuries stock rockets to Rs59bn

Oct 24, 2008 (LBO) – Sri Lanka’s central bank says it is ready to accommodate additional foreign currency outflows from foreign bond holders even as snowballing T-bill purchases showed pressure building up in the monetary system.

The central bank said in a statement Thursday that it had ‘absorbed’ dollar inflows of 622 million in the first eight months of the year “to deal with any adverse shock that could arise from a sudden withdrawal of foreign currency from the system.”

The bank says it “retained” a part of the capital inflows that came from Treasury Bond and Bill sales to foreign bondholders. Government securities were opened to foreign players after budget deficits increased and fiscal policy deteriorated.

“The accumulation of foreign currency on that basis also substantially increased the international reserves of the Central Bank,” the central bank said.

Soft-peg problem

Analysts had warned at the time that sterilizing the rupee liquidity arising from dollar inflows (resisting an increase in the monetary base) and taking dollars out of the country as central bank foreign reserves cancelled out any potential benefit to the economy from capital inflows generated from bond sales.

At that